RESTRICTED  WORLD  TRADE  
ORGANIZATION  WT/TPR/S/164 
3 May 2006  
 
(06-2075) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
Report by the Secretariat 
 
ICELAND 
 
  
 
This report, prepared for the third Trad e Policy Review of Iceland, has been 
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has, 
as required by the Agreement establishing the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), sought clarification from Iceland on its trade policies and 
practices. 
 
Any technical questions arising from this  report may be addressed to Ms. Katie 
Waters (tel. 022 739 5067), Mr. Karsten Steinfatt (tel. 022 739 6759) and 
Mr. Raymundo Valdés (tel. 022 739 5346). 
 
Document WT/TPR/G/164 contains the policy statement submitted by Iceland. 
 
 
Note: This report is subject to restricted circ ulation and press embargo until the end of the first 
 session of the meeting of the Trade Policy Review Body on Iceland. Iceland WT/TPR/S/164 
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CONTENTS 
 Page 
SUMMARY OBSERVATIONS vii 
 (1) I NTRODUCTION  vii 
 (2) E CONOMIC ENVIRONMENT  vii 
 (3) T RADE AND INVESTMENT POLICY FRAMEWORK  viii 
 (4) M ARKET ACCESS FOR GOODS  viii 
 (5) O THER MEASURES AFFECTING TRADE  ix 
 (6) S ECTORAL POLICIES  ix 
I. ECONOMIC ENVIRONMENT 1 
 (1) O VERVIEW  1 
 (2) S TRUCTURE OF THE ECONOMY , OUTPUT , AND EMPLOYMENT  1 
 (3) M ONETARY AND EXCHANGE RATE POLICIES  4 
 (4) F ISCAL POLICY  5 
 (5) B ALANCE OF PAYMENTS  7 
 (6) E XTERNAL TRADE  8 
 (7) F OREIGN DIRECT INVESTMENT  10 
 (8) O UTLOOK  10 
II. TRADE AND INVESTMENT POLICY FRAMEWORK 11 
 (1) O VERVIEW  11 
 (2) T RADE POLICY FORMULATION AND IMPLEMENTATION  11 
 (i) General legal framework 11 
 (ii) Trade policy formulation, implementation, and objectives 12 
 (3) F OREIGN INVESTMENT REGIME  12 
 (4) I NTERNATIONAL RELATIONS  14 
 (i) World Trade Organization 14 
 (ii) Preferential tr ade agreements and other arrangements 15 
III. TRADE POLICIES AND PRACTICES BY MEASURE 20 
 (1) I NTRODUCTION  20 
 (2) M EASURES DIRECTLY AFFECTING IMPORTS  21 
 (i) Procedures and documentation 21 
 (ii) Customs valuation 23 
 (iii) Rules of origin 24  (iv) Tariffs 24 
 (v) Other charges affecting imports 27 
 (vi) Import restrictions including licensing 31  (vii) Contingency measures 33 
 (viii) Standards and technical regulations 35 
 (ix) Sanitary and phytosanitary measures 37 WT/TPR/S/164 Trade Policy Review 
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 Page 
 (3) M EASURES DIRECTLY AFFECTING EXPORTS  40 
 (i) Procedures and charges 40 
 (ii) Export quotas, prohibitions, restrictions and licensing 41  (iii) Duty and tax concessions 41 
 (iv) Export promotion, finance, insurance, and guarantees 42 
 (4) M
EASURES AFFECTING PRODUCTION AND TRADE  43 
 (i) Legal framework for businesses 43 
 (ii) Competition policy 45 
 (iii) Incentives and other government assistance 48  (iv) State trading, state-owned enterprises, and privatization 51 
 (v) Government procurement 52 
 (vi) Intellectual property rights 56 
IV. TRADE POLICIES BY SECTOR 64 
 (1) O
VERVIEW  64 
 (2) A GRICULTURE  65 
 (i) Main features 65 
 (ii) General support schemes 67 
 (iii) Support for dairy, sheep, and vegetable production 68 
 (iv) Tariffs and tariff quotas 69 
 (v) Other border measures 71  (vi) Internal taxation 71 
 (3) F
ISHERIES AND FISH PROCESSING  72 
 (i) Main features 72  (ii) Institutional and legal framework 73 
 (4) O
THER MANUFACTURING  75 
 (5) E NERGY   77 
 (i) Main features 77 
 (ii) Institutional and legal framework 78 
 (6) S ERVICES  79 
 (i) Main features 79 
 (ii) Telecommunications 80 
 (iii) Financial services 83  (iv) Air transport 89 
 (v) Maritime transport 92 
REFERENCES   97 
APPENDIX TABLES  101 
 
CHART 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 III.1 Frequency distribution of MFN tariff rates, 2005      28 
 Iceland WT/TPR/S/164 
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TABLES 
 
 Page 
I. ECONOMIC ENVIRONMENT  
I.1 Gross domestic product by industry, 1999-04      2
 
I.2 Basic macroeconomic indicators, 1999-05       3 
I.3 Selected monetary and exchange rate indicators, 1999-05     5 
I.4 General government finances, 1999-05       6 
I.5 Balance of payments, 1999-05        7  
II. TRADE AND INVESTMENT POLICY FRAMEWORK 
 II.1 Selected submissions of Iceland in the context of the Doha Development Agenda,  
 December 2005          15 
II.2 Participation of Icelan d in preferential trade agr eements, November 2005   18 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
III.1 Structure of tariff schedule in Iceland, 2005       25 
III.2 Summary analysis of Iceland MFN tariff, 2005      26 III.3 VAT rates different from 24.5%, end 2005       29 
III.4 Other taxes and charges on production and consumption (including imports), 2005  30 
III.5 Goods subject to licensing or other import requirements     31
 
III.6 Products subject to conditional import ban under Regulation 509/2004    39 
III.7 Export prohibitions and export licensing requirements, March 2006    41 
III.8 Principal business structures in Iceland, responsible agencies , and selected requirements  43  
III.9 Support programmes currently operational in Iceland (excludes agriculture)   49 
III.10 Highlights of r ecent and prospective privatization      52 
III.11 National legislation on government procurement currently in force    53 III.12 Government procurement threshold values under national legislation and the EEA 
 a n d  G P A  a g r e e m e n t s          5 4  
III.13 Time periods for participating in government procurement tenders    54 III.14 Summary of main IPR legislation currently in force in Iceland     57 
III.15 Fees levied on equipment for audio and video recording     59 
 IV. TRADE POLICIES BY SECTOR 
 
IV.1 Production of main crops and meat, 2000-04       66 
IV.2 Products subject to tariff quotas 1 July 2004-30 June 2005     70 
IV.3 Treasury income derived from taxes and fees applied on agricultural activities, 2004  71 IV.4 Manufactured products, 2004        75 
IV.5 Telecommunications legislation currently in force      82 
IV.6 Main air transport-related legislation       91 IV.7 Maritime transport-related legislation currently in force in Iceland, 2006   95 WT/TPR/S/164 Trade Policy Review 
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APPENDIX TABLES 
 
 Page 
I. ECONOMIC ENVIRONMENT  
AI.1 Merchandise exports by groups of products, 1994-04      103 
AI.2 Merchandise imports by groups of products, 1994-04      104 AI.3 Merchandise exports by trading partner, 1994-04      106 
AI.4 Merchandise imports by trading partner, 1994-04      107 
 II. TRADE AND INVESTMENT POLICY FRAMEWORK 
 
AII.1 Selected notifications to the WTO, 2000-05       108  
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 AIII.1 Technical regulations notified by Iceland to  the EFTA Surveillance Authority, 2000-05  110 
AIII.2 Iceland’s participation in international IPR agreements     111 
 
IV. TRADE POLICIES BY SECTOR 
 AIV.1 Iceland's specific commitments  under the GATS      112 
 
 Iceland WT/TPR/S/164 
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SUMMARY OBSERVATIONS 
 
(1) INTRODUCTION  
1. Iceland's standard of living is among 
the world's highest, in part due to the overall 
openness of its economy facilitating its international specialization and consequent gains from trade.  Since its previous Review in 2000, Iceland has continued to exploit its 
traditional strengths in fisheries and energy, 
while developing new activities.  However, certain agricultural activities remain highly assisted, which both imposes costs on taxpayers and consumers, and reduces overall welfare.  Taking further steps to reduce 
agricultural assistance could bring economic 
benefits, and help align agricultural policy with the market-based solutions that have helped Iceland to prosper. 
2. Iceland undertook numerous reforms 
during the review period, often driven by its 
participation in the European Economic Area (EEA) Agreement.  A number of policy changes, including liberalization of foreign investment restrictions, have focused mostly on EEA partners and, thus, widened the gap 
between the treatment Iceland affords such 
partners and other WTO Members.  Closing this gap by applying reforms on an MFN basis, and securing them in the WTO, would help reduce trade and investment distortions, 
enhance competition in the domestic market, 
and prevent over-reliance on the EEA market.  These are important considerations in view of Iceland's recurrent macroeconomic imbalances, which in early 2006 were again 
testing the flexibility of its economy. 
(2) E
CONOMIC ENVIRONMENT  
3. Iceland's per capita income is among 
the world's highest (around US$33,500 per person).  Historically, Iceland's economic performance has been volatile, partly due to 
its small size and strong dependence on only a 
handful of production activities and export goods.  However, volatility has decreased since the early 1990s, reflecting the increased diversification of the economy, the implementation of structural reforms, and 
improved macroeconomic policies.  Iceland's public finances are sound but, arguably, a stronger counter-cyclical fiscal policy could 
help smooth macroeconomic fluctuations.  
Monetary policy has been conducted within an inflation-targeting framework since 2001. 
4. Iceland's average annual economic 
growth was around 3.6% in the period 2000-
05.  There was a short and shallow recession 
in 2002 but growth resumed in 2003 supported by domestic demand, particularly large-scale investment projects in the aluminium and power sectors, and buoyant private consumption.  As growth gained momentum in 
2004 and continued in 2005, signs of 
overheating were manifested in rising inflation, rapid credit growth, booming asset prices, a widening current account deficit, and rising external indebtedness.  In this context, 
monetary policy has been tightened, and the 
fiscal stance has become more restrictive.  There is a risk that, against the backdrop of growing imbalances, the sharp depreciation of Iceland's currency in early 2006 could lead to a significant retrenchment in domestic demand 
particularly in view of Iceland's high levels of 
external indebtedness. 
5. The  share of merchandise trade in 
Iceland's GDP has remained relatively constant since at least 1980, and, at around 
50%, is low for a small economy.  Membership 
in the EEA seems to have had a significant effect on Iceland's export pattern, which is increasingly dominated by the European Union.  Food, mostly in the form of 
fish products, remains Iceland's most 
important export category although the composition of the export basket has changed sharply, reflecting an increase in the share of manufactured products in total exports between 1998 and 2004, notably aluminium 
and medicaments.  Services trade has been 
very dynamic in recent years, as has direct investment, both inward and outward. WT/TPR/S/164 Trade Policy Review 
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(3) TRADE AND INVESTMENT POLICY 
FRAMEWORK  
6. Given its small size, Iceland sees its 
participation in international trade as an 
indispensable element of economic policy and 
one of the factors contributing to its economic success.  Iceland has participated actively in the multilateral trading system, despite its lean public administration, and has submitted 
several proposals in the context of the Doha 
Development Agenda.  It  has made numerous 
notifications but a few are still outstanding, such as on agricultural export subsidies, preferential rules of origin, government 
procurement, and SPS measures.  Iceland has 
never been involved in any dispute in the 
WTO. 
7. Iceland conducts trade policy within 
the framework of its participation in the EEA and, as required by the EEA Agreement, has 
transposed into domestic law most EU single 
market legislation.  This has led to continued wide-ranging economic reforms since 2000, while also widening the gap between the treatment afforded to EEA and non-EEA partners in various economic sectors.  As a 
member of the EEA, Iceland grants largely 
unrestricted access to goods, workers, services, and capital from other EEA members. 
8. In the context of its participation in 
the European Free Trade Association (EFTA), 
Iceland has a large and growing network of free-trade agreements, which mostly mirror those of the EU.  As a result, Iceland offers preferential tariffs on imports from 37 WTO 
Members under various free-trade 
agreements.  Excluding the EEA and EFTA, free-trade agreements cover a very limited amount of Iceland's trade.  Iceland applies the Pan-European Cumulation System for rules of preferential origin. 
9. Iceland maintains restrictions on 
foreign investment in a few but important domestic sectors:  fisheries, energy, and 
airline operations.  Some restrictions on investment apply only to non-EEA or non-OECD nationals and companies.  In addition, 
Iceland's legislation gives the State broad authority to limit foreign investment in the event of serious economic difficulties in 
particular sectors. 
(4) M
ARKET ACCESS FOR GOODS  
10. Iceland maintains relatively low MFN 
applied tariffs, the overall average standing at 5.9%;  however, the average on agricultural 
products is much higher (18.3%, WTO 
definition) than the average on other products (2.5%).  About 70% of Iceland's tariff lines are duty free and 4.7% are non-ad valorem;  the latter apply to agricultural products and result in ad valorem equivalents of up to some 500%.  
Agriculture also receives high tariff protection 
under preferential agreements.  Tariff protection is high at the first stage of processing and for fully processed products, but low for semi-processed products. 
11. Tariff quotas apply to 86 tariff lines, 
with out-of-quota rates ranging up to 306%.  Quotas are auctioned when demand exceeds available in-quota volumes for minimum access commitments.  This system promotes the efficient allocation of quotas among users 
and generates additional government revenue 
but also increases costs to traders.  So far quotas have not been assigned to particular countries but from 2007 a reciprocal quota system will enter come into operation with the 
EU. 
12. Some 95% of all tariff lines are bound 
but the average bound rate (31.5%) is much higher than the average applied rate, which reduces the predictability  otherwise afforded 
by Iceland's comprehensive tariff bindings.  
For a small number of tariff lines, applied rates are higher than bound rates. 
13. Iceland has not used anti-dumping, 
countervailing or safeguards measures. 
14. Iceland acceded to the WTO 
Government Procurement Agreement in 2001, 
when it also adopted new laws on public procurement and on public projects Iceland WT/TPR/S/164 
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procedures.  Limitations on the coverage of 
Iceland's GPA commitments relate to, among others, various services sectors, certain services or utilities contracts, and the 
procurement of animal products.  Iceland is in 
the process of establishing a system for the collection of the statistical information required under the GPA. 
15. In 2000, Iceland notified the WTO of 
its legislation to implement the TBT 
Agreement.  Iceland is required to transpose EEA legislation on technical regulations, standards, testing and certification, and the majority of Iceland's standards and technical regulations follow EU norms.  During the 
period under review, Iceland made 41 
notifications concerning draft technical regulations to the EFTA Surveillance Authority but only one to the WTO.   
16. Under the SPS Agreement, Iceland 
has notified to WTO Members certain 
emergency import bans;  however, it has yet to notify Regulation 509/2004, which banned the import of specified agricultural products unless an exemption is granted by the Minister of Agriculture.  Although Iceland has a wide 
derogation from EEA sanitary legislation, in 
practice many of its SPS regulations have been harmonized with those of the EU.  Animal products from animals that have been given growth promoting agents or hormones are 
banned in Iceland.  The authorities indicate 
that no restrictions are currently in place on genetically modified organisms. 
17. Iceland adopted three new IPR-
related laws over the review period:  the 
Design Protection Act, the Act Respecting 
Collective Marks, and the Act Respecting Employees Inventions.  Other IPR legislation has been amended.  Iceland is signatory to a number of international IPR treaties, and since 2000 it has acceded to the Geneva Act of 
the Hague Agreement Concerning the 
International Registration of Industrial Designs as well as the European Patent Convention. (5) O
THER MEASURES AFFECTING 
TRADE  
18. There are very few measures directly 
affecting exports in Iceland, and these are 
related mostly to agricultural products (see 
below).  Export restrictions or licensing are applied to protect human and animal health or for other non-commercial reasons.  There is little by way of official export finance 
available to Icelandic businesses. 
19. Significant amendments have been 
made since 2000 to Iceland's competition regime to implement institutional changes and EEA legislation, and to strengthen the powers of the competition authority.  Iceland's 
national competition regime runs in parallel 
with EEA competition rules, which apply where restrictive practices may affect trade between EEA members.   
20. Retail distribution of alcoholic 
beverages and import and wholesale of 
tobacco and tobacco products are the preserve of the State Alcohol and Tobacco Monopoly, Iceland's only state trading enterprise.  Iceland has continued to privatize state enterprises during the period under review, 
and these have included assets in banking, 
telecommunications, and the Agricultural Loan Fund.  Steps have also been taken to simplify the tax system and reduce tax rates, notably, by reducing corporate income tax 
from 30% to 18% and abolishing the wealth 
tax. 
21. Excluding agriculture, state aid is low 
and generally of a horizontal nature, targeting mainly research and development, promotion 
of small and medium sized enterprises, 
training and job creation. 
(6) S
ECTORAL POLICIES  
22. Iceland's small agricultural sector is 
among the world's most highly assisted, with the producer support estimate at about 70%.  
Assistance targets mainly  the sheep and dairy 
sectors.  Milk is subject to production-linked direct payments, production quotas and  WT/TPR/S/164 Trade Policy Review 
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administered prices.  Sheep farmers receive 
direct payments based on support targets and quality-dependent payments.  Producers of lamb meat must export a percentage of their 
production.  Over the period under review, 
changes to agricultural policy included the establishment of a price equalization mechanism to support agricultural exports, whereby exports of goods made from 
agricultural raw materials benefit from a 
refund equal to the difference between the cost of raw materials in the international and 
domestic markets;  the introduction of direct payments to farmers producing vegetables and plants in greenhouses;  and the creation of 
new rules regarding the production of milk.  In 
its most recent notification to the WTO, Iceland indicated that it had not provided export subsidies in agriculture for the years 2000-02.   
23. Fishing and fish processing continues 
to be a mainstay of the Icelandic economy, accounting for 60% of total merchandise export revenue.  To protect the resource base, fisheries are managed through a system of individual transferable quotas;  in 2004, a 
fishing fee levied on owners of vessels holding 
harvesting rights was introduced.  The EEA Agreement does not cover fisheries.  Ownership of fishing operations and primary fish processing is limited to Icelandic 
nationals or residents, although non-residents 
can own up to 25% of the shares in Icelandic companies involved in these activities. 
24. Iceland is richly endowed with energy 
resources, and energy costs are low by 
international standards.  Driven by Iceland's 
EEA commitments, there have been a number of important legislative changes over the review period to promote greater efficiency and competition.  However, the electricity industry remains entirely owned by the State 
or local governments.  Only Icelandic, EEA or 
EFTA residents and legal entities may own energy exploitation rights or enterprises involved in producing or distributing energy, although agreements may be reached to 
extend these benefits to other parties. 25. Manufacturing activities in Iceland 
are concentrated mainly  in energy-intensive 
industries, notably aluminium production, although other industries have gained in 
importance.  The sector is export-orientated 
due to the small size of the domestic market.  Manufactured exports have expanded significantly over the review period and the development of new aluminium smelting 
capacity has generated significant inflows of 
foreign direct investment.  A feature of the review period has been the growth in turnover and export of medicinal and medical products.  
26. The services sector is of increasing 
importance to Iceland, accounting for some 
80% of GDP in 2004  This expansion has been 
driven largely by financial services, and real estate, renting and business activities.  Under the GATS, Iceland undertook sector-specific commitments in 9 of the 12 sectors included in 
the services classification.  It also signed the 
Fourth Protocol on Basic Telecommunications and the Fifth Protocol on Financial Services.  Iceland has submitted initial and revised GATS conditional offers in the context of the Doha Development Agenda. 
27. There have been major changes in the 
telecommunications sector during the period under review.  Legislative developments driven by Iceland's EEA commitments have been aimed at creating a more liberal and 
competitive environment.  In addition, 
stemming from Iceland's WTO commitments, a regulation was issued confirming the right of companies established in WTO Members to offer telecommunication services in Iceland.  
Other changes include the separation of postal 
from telephone services and the privatization of Iceland Telecom, which was sold to a consortium of predominantly Icelandic investors. 
28. The current structure of the financial 
services sector is the result of a process of 
privatization and intense consolidation between 1998 and 2003.  A state-owned firm (the Housing Financing Fund) remains the largest institution in the financial system.  
There is one branch of a foreign bank  Iceland WT/TPR/S/164 
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operating in Iceland, but no subsidiaries or 
representative offices of foreign banks.  In contrast, Icelandic banks have made significant international acquisitions.  
Iceland's insurance market  is characterized by 
a relatively high degree of concentration.  Financial services legislation has been extensively revised since Iceland's last Review.  Iceland's banking and insurance markets are 
largely open to foreign participation, although 
treatment of foreign firms differs markedly between firms licensed in EEA States and other firms. 
29. Due to Iceland's geographical 
location and its reliance on international 
trade, maritime and air transport play a major 
role in its economy.  Iceland's civil aviation industry is subject to EEA competition laws, and one case was referred to the EFTA Court during the review period.  Foreign ownership 
in Icelandic companies involved in airline 
operations may not exceed 49%, although this limitation does not apply to EEA nationals, who are granted national treatment.  In 
addition, no undertaking may be granted an operating licence unless it is effectively controlled by EEA nationals.  Iceland has 
signed and is in the process of completing a 
number of bilateral air transport agreements, most of which are open skies agreements. 
30. Practically all movement of goods to 
and from Iceland is by maritime transport.  
Costs are high because of the distances 
involved, low competition, and small volumes transported.  There are no restrictions on private or foreign ownership of ports, however, all ports are currently the property of the community in which they are located.  
Iceland is one of the few WTO Members to 
have requested that its offer made in the suspended extended WTO Negotiations on Maritime Transport Services be made part of its GATS Schedule of Specific Commitments.  
In addition Iceland is the only WTO Member 
to have scheduled a sp ecific commitment on 
cabotage.